ECB, Bank of England Policy Divergence to Impact Euro, Sterling Exchange, Says MUFG

06:51 AM EST, 12/18/2025 (MT Newswires) -- Sterling (GBP) has continued to trade at weaker levels ahead of Thursday's Bank of England policy meeting following the release earlier in the week of the much weaker-than-expected United Kingdom consumer price index report for November, said MUFG.

The report has reinforced expectations that the BoE will vote to cut rates on Thursday by a further 25bps, and deliver multiple rate cuts in 2026 as well, wrote the bank in a note to clients.

There is a compelling case for the BoE to continue cutting rates as the policy rate isn't yet in neutral territory, inflation and wage growth continue to slow, and weakening labor demand is creating looser labor market conditions, stated MUFG. The main caveats that could still justify caution from more hawkish BoE Monetary Policy Committee members include that wage growth didn't slow as much as expected and core services inflation is still proving sticky.

The bigger drop in inflation in November was partially exaggerated as well by early Black Friday discounts. With a 25bps cut fully priced in, market participants will be closely scrutinizing the updated guidance to assess the future path for rate cuts.

Another close 5-4 vote could offer some initial support for sterling, while a stronger majority in favor of a cut would trigger a further sell-off. The bank expects the guidance to indicate that further quarterly rate cuts are likely during the H1 of next year.

MUFG has been forecasting a low for the policy rate at 3.25% next year, but the risk of more cuts has increased recently, supporting the bank's outlook for further sterling weakness in 2026.

In contrast to the BoE, the European Central Bank is expected to leave rates on hold on Thursday and signal with more confidence that policy is in a "good place." Recent activity, wage and inflation data have all surprised to the upside, encouraging market participants to scale back expectations for further cuts next year, added MUFG.

It has helped to lift short-term rates in the eurozone, providing more support for the euro (EUR), according to the bank. The ECB is unlikely to be overly concerned by the release of the softer eurozone PMI survey for December. With the ECB keeping rates on hold for longer and the BoE still cutting rates, MUFG expects EUR/GBP to rise up closer to the 0.9000 level next year.

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.